Allocation of Resources
2.1.1 Differences Between Micro & Macro
Microeconomics & Macroeconomics
Some Of The Differences Between Micro- & Macroeconomics
Microeconomics Macroeconomics
Single market e.g. milk Entire economy e.g. Singapore
Average price levels in an economy
Price of a good/service
(inflation/deflation)
Individual/market demand Total demand in an economy
Individual firm/market supply Total supply in an economy
Government intervention in a market e.g. Government intervention in the economy e.g
cigarettes income tax
Reasons for differences in workers wages Unemployment & minimum wages
Microeconomics is the study of individual markets & sections of the economy, rather
than the economy as a whole
o It examines the different choices individuals, households & firms
o It examines what factors influence their choices
o It examines how their decisions affect the price, demand & supply of
goods/services in a market
o It examines how Governments influence consumption & production
Macroeconomics is the study of economic behaviour & decision making in the entire
economy, rather than just an individual market
o It examines the role of the government in achieving economic growth & human
development through the implementation of specific government policies
(fiscal, monetary & supply-side)
o It examines the role of the government in achieving price stability, low
unemployment & a stable Current Account balance on the Balance of
Payments account
o It examines the interaction of the economy with the rest of the world
through international trade
Decision Makers in Micro & Macro
Decision Makers & Their Choices In Microeconomics
Decision Maker Choices They Make
Consumers Which combination of goods/services do they value the most
How to respond to changes in markets they consume in
How much money to save, spend or borrow
Firms Which combination of goods/service to supply
How to best produce goods/services in order to meet their objective
(usually profit maximisation)
How to respond to changing market conditions
Government Which policies will be most effective in addressing specific market
failures
Which industries/markets are essential & require government support
Decision Makers & Their Choices In Macroeconomics
Decision Maker Choices They Make
Consumers How to best respond to changing macroeconomic conditions such
as recessions or interest rate rises
Firms How to best respond to changing macroeconomic conditions such
as recessions, interest rate rises or a low supply of labour
Whether to sell their goods/services locally, nationally or
internationally
Government Determining the best combination of policies that will help them to
meet all of their macroeconomic aims
Multi national Which countries to invest in
corporations (MNCs)
How to best develop international advantages
How to engage with the government & local workforce in a way
that maximises profit without harming the brand image
2.2.1 The (Free) Market System
Different Economic Systems
In order to solve the basic economic problem of scarcity, economic systems emerge or
are created by different economic agents within the economy
o These agents include consumers, producers, the government, & special
interest groups (e.g. environmental pressure groups or trade unions)
o Any economic system aims to allocate the scarce factors of production
The three main economic systems are a (free) market system, mixed economy,
& planned economy
What Determines The Economic System Of A Country
How the three questions are answered determines the economic system of a country
Economic decisions need to be made to answer three important questions
1. What to produce? As resources are limited in supply, decisions carry an opportunity cost.
Which goods/services should be produced e.g. better rail services or more public
hospitals?
2. How to produce it? Would it be better for the economy to have labour-intensive
production so that more people are employed, or should goods/services be produced
using machinery?
3. For whom are the goods and services to be produced? Should goods/services only be
made available to those who can afford them, or should they be freely available to all?
How These Questions Are Answered Determines the Economic System
Type of System What to Produce? How to Produce? For Whom?
Market System Demand & supply (the Most efficient, profitable Those who can afford it
price mechanism) way possible.
Mixed System Demand, supply & the Some efficiency but also Those who can afford it,
Government a focus on welfare/well- plus some provision to
being those who cannot afford
it
Planned System The Government Ensure everyone has a Everyone
job
How a Market System Works
A market system works to allocate scarce resources efficiently, purely through the forces
of demand & supply (the price mechanism)
o There is no government intervention in a pure market system (no taxes or
government spending)
o In reality, there is no economy which is a pure market system
In a market system, prices for goods/services are determined by the interaction of
demand & supply
o A market is any place that brings buyers & sellers together
o Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay)
The price mechanism is the interaction of demand and supply in a free market
o This interaction determines prices which are the means by which scarce
resources are allocated between competing wants/needs
The price mechanism fulfils several functions in an economy
o Prices allocate (ration) scarce resources. When resources become scarcer the
price will rise further. Only those who can afford to pay for them will receive
them. If there is a surplus then prices fall & more consumers can afford them
o Prices provide information to producers & consumers where resources are
required (in markets where prices increase) & where they are not (in markets
where prices fall)
o When prices for a good/service rise, it incentivises producers to reallocate
resources from a less profitable market to this market in order to maximise their
profits. Falling prices incentivise reallocation of resources to new markets
Market Equilibrium & Disequilibrium
Equilibrium in a market occurs when demand = supply
At this point the price is called the market clearing price
o This is the price at which sellers are clearing their stock at an acceptable rate
A graph showing a market in equilibrium with a market clearing price at P and quantity at
Q
Any price above or below P creates disequilibrium in this market
o Disequilibrium occurs whenever there is excess demand or supply in a market
2.3 Demand
2.3.1 Demand, Price & Quantity
Introduction to Demand
Demand is the amount of a good/service that a consumer is willing & able to
purchase at a given price in a given time period
o If a consumer is willing to purchase a good, but cannot afford to, it is not effective
demand
A demand curve is a graphical representation of the price & quantity demanded
(QD) by consumers
o If data were plotted, it would be an actual curve. Economists, however, use
straight lines so as to make analysis easier
Individual & Market Demand
Market demand is the combination of all the individual demand for a good/service
o It is calculated by adding up the individual demand at each price level
The Monthly Market Demand For Newspapers In A Small Village
Customer 1 Customer 2 Customer 3 Customer 4 Market Demand
30 15 4 4 53
Individual & market demand can also be represented graphically
Market demand for children's swimwear in July is the combination of boys & girls demand
Diagram Analysis
A shop sells both boys & girls swimwear
In July, at a price of $10, the demand for boys swimwear is 500 units & girls is 400 units
At a price of $10, the shops market demand during July is 900 units
Movements Along a Demand Curve
If price is the only factor that changes (ceteris paribus), there will be a change in the
quantity demanded (QD)
o This change is shown by a movement along the demand curve
A demand curve showing a contraction in quantity demanded (QD) as prices increase & an
extension in quantity demanded (QD) as prices decrease
Diagram Analysis
An increase in price from £10 to £15 leads to a movement up the demand curve from
point A to B
o Due to the increase in price, the QD has fallen from 10 to 7 units
o This movement is called a contraction in QD
A decrease in price from £10 to £5 leads to a movement down the demand curve from
point A to point C
o Due to the decrease in price, the QD has increased from 10 to 15 units
o This movement is called an extension in QD
The law of demand captures this fundamental relationship between price and QD
o It states that there is an inverse relationship between price and QD
When the price rises the QD falls
When prices fall the QD rises
2.3.2 Conditions of Demand
Shifts of the Demand Curve
There are numerous factors that will change the demand for a good/service, irrespective
of the price level. Collectively these factors are called the conditions of demand
Changes to each of the conditions of demand, shifts the entire demand curve (as
opposed to a movement along the demand curve)
A graph that shows how changes to any of the conditions of demand shifts the entire
demand curve left or right, irrespective of the price level
For example, if a firm increases their Instagram advertising, there will be an increase
in demand as more consumers become aware of the product
o This is a shift in demand from D to D1. The price remains unchanged at £7 but
the demand has increased from 15 to 25 units
An Explanation of How Each of the Conditions of Demand Shifts the Entire Demand
Curve at Every Price Level
Condition Explanation Condition Shift Condition Shift
Changes in Real Income determines how many Income D Income D
Real Income goods/services can be enjoyed by Increases Increases Decreases Decrease
consumers Shifts s
Right Shifts
There is a direct relationship between
(D→D1) Left
income & demand for goods/services
(D→D2)
Changes in If goods/services become Good D Good D
taste/fashion more fashionable then demand for them becomes Increases becomes Decrease
increases more Shifts less s
fashionable Right fashionable Shifts
There is a direct relationship between
(D→D1) Left
changes in taste/fashion & demand
(D→D2)
Advertising/ If more money is spent Advertisin D Advertisin D
branding on advertising or branding, then demand g Increases Increases g Decrease
for goods/services will increase as more Shifts Decreases s
consumers are aware of the product Right Shifts
(D→D1) Left
There is a direct relationship
(D→D2)
between branding/advertising & deman
d
Changes in the Changes in the price of substitute Price of D for Price of D for
prices of goods will influence the demand for a Good A Good B Good A Good B
substitute product/service Increases Increases Decreases Decrease
goods Shifts s
There is a direct relationship between
Right Shifts
the price of good A & demand for good
(D→D1) Left
B
(D→D2)
For example, the price of a Sony 60" TV
increases so the demand for LG 60" TV
increases
Changes in the Changes in the price Price of D for Price of D for
prices of of complementary goods will influence Good A Good B Good A Good B
complementary the demand for a product/service Increases Decrease Decreases Increases
goods s Shifts
There is an inverse relationship between
Shifts Right
the price of good A & demand for good
Left (D→D1)
B
(D→D2)
For example, the price of printer ink
increases so the demand for ink printers
decreases
Changes in If the population size of a country Population D Population D
population changes over time, then the demand for Increases Increases Decreases Decrease
size/distributio goods/services will also change Shifts s
Exam Tip
The difference between a movement along the demand curve and a shift in demand is
essential to understand. You will be repeatedly examined on this and it is important that you use
the correct language to show that you understand the difference between a change in quantity
demanded and a change in demand.
When price changes (ceteris paribus), there is a movement along the demand curve resulting in
a change to quantity demanded. When a condition of demand changes, there is a shift of the
entire demand curve resulting in a change to demand.
2.4 Supply
